LOSS AVERSION AND THE LOCUS OF NONLINEARITY IN DECISION UNDER RISK: A TEST BETWEEN PROSPECT THEORY AND SP/A THEORY WITH FUNCTIONAL MEASUREMENT

Abstract

Measuring loss aversion requires the capability to measure subjective values of loss and gain on a common unit scale with a common known zero. The present work rests upon a previously established ratio model for the integration of uncertain gains and losses, which allows that value and probability weighting functions be derived on a common metrics with a common zero. Observed functional shapes concurred generally with those predicted by Prospect Theory (PT) and disagree with a view of probability evaluation as the major, if not exclusive, source of nonlinearities in decision under risk, as advocated, for instance, in SP/A. Loss aversion was found for some but not for all subjects, which agrees with the role given to differential risk preferences in SP/A. For those subjects who exhibited loss aversion, its magnitude was consistently found inferior to that typically estimated with PT.